Markets continue to set records |

Markets continue to set records

Ken Armstrong, Shane Fleury & Steve Shanley
The Northwestern Mutual Wealth Management Company — Vail Valley

Despite the political drama caused by the resignation of Michael Flynn, the new head of the National Security Agency, American investors were unfazed.

In fact, the major stock exchanges set record after record last week in the resurgent "Trump rally," buoyed by fourth-quarter earnings news, an upbeat outlook on the economy from the Federal Reserve's Chairwoman Janet Yellen, and the prospect of the new administration's plans to boost growth. All three of the major indexes once again closed the week at a new high – the Dow Jones Industrial Average has notched one seven days in a row and is now closer to 21,000 points than 20,000, while the Nasdaq is nearing the 6,000-point mark.

Yellen and Congress

Yellen visited Capitol Hill last week and offered a positive view of the economy, while also jousting with House Republicans over what the Fed has or hasn't done since the financial crisis. During her appearance before the Senate Banking Committee on Monday, Democrats urged her to defend regulations designed to avoid another recession such as the Dodd Frank Act, which the new administration would like to revise or replace. She said that Dodd Frank worked and that it was not stifling the economy, noting the low jobless rate and the fact that inflation was finally nearing the Fed's target of 2 percent. She wouldn't say whether the Fed would raise its rate at its March meeting, but stood by the December forecast of three hikes in 2017, noting, "It is our expectation that rate increases this year will be appropriate," and adding that waiting too long to raise rates "would be unwise."

The next day, she was pressed to concede before the House Financial Services Committee that the Fed policy had failed and the economy was in a poor state. While she did admit that growth had been "quite disappointing," she also said, "I think financial regulation has resulted in a stronger financial system and less risk than we had before the crisis. It's allowed us to have stronger growth and a faster economy."

The new budget

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Representative Mick Mulvaney (R, South Carolina) was confirmed as budget director on Thursday, and it was promptly announced that the government could reduce or end the funding of organizations that have been GOP targets for many years, such as the National Endowment of the Arts and the Corporation for Public Broadcasting, as well as the Export-Import Bank. The list is expected to be finalized by mid-March; funding for the current fiscal year ends on April 28.

Cutting back at the pump

The United States Energy Information Administration (EIA) reported that the price of a gallon of gas was up 31 percent in January from a year ago, and the higher cost impacted gas sales in January, which fell 4.4 percent from January 2016, according to the Oil Price Information Service. The EIA also said that storage levels rose last week to 259 million barrels, the most since 1990.

Around the eurozone

Economic growth for the eurozone was 0.4 percent in the fourth quarter, according to Eurostat, slightly below the original estimate of 0.5 percent. And while President Trump has said he will review American trade pacts – and recently rejected the proposed Trans-Pacific Partnership Agreement – Canada and the European Union announced the Comprehensive Economic and Trade Agreement, the product of seven years of negotiations.

Another mega-merger?

On Friday, Kraft-Heinz bid $143 billion to acquire the UK-based Unilever Plc, though the offer was flatly rejected by Unilever's board and was withdrawn by Kraft on Sunday. The proposed deal would have created a company with worldwide sales of $82 billion and, according to Thomson-Reuters, it would have been the third largest takeover ever.

Retail sales improve, small business confidence soars and inflation rises

Retail sales totaled $472.1 billion in January, up 0.4 percent from the month before and 5.6 percent from a year earlier – excluding autos, sales improved a solid 0.8 percent. The new president's pledge to reduce regulations helped drive the National Federation of Independent Business's Small Business Optimism Index to a 12-year high of 105.9 in January from December's 105.8. As a result of higher prices at the pump – and supporting Yellen's case that inflation is rising – January's Consumer Price Index (CPI) increased at its fastest pace since February 2013, up 0.6 percent compared to 0.3 percent in December. CPI climbed 2.5 percent from a year earlier, the highest reading since March 2012. Core CPI, excluding food and energy, was up 0.3 percent from December and 2.3 percent from January of last year. Meanwhile, the Producer Price Index (PPI) rose 0.6 percent in January from December and 1.6 percent year over year. Core PPI, rose 0.4 percent month over month and 1.2 percent from January 2016. Industrial production fell 0.3 percent in January after December's 0.6 percent gain, largely because the warm winter weather resulted in lower demand for heating oil. Manufacturing, however, was up 0.2 percent from the month before; capacity utilization declined to 75.3 percent from 75.6 percent. Housing starts in January fell 2.6 percent from December to 1,246,000, but increased 10.5 percent from a year earlier. Building permits, however, jumped 4.6 percent in January to 1,285,000, 8.2 percent higher than in January 2016. The Fed said that household debt rose 1.8 percent to $226 billion in the fourth quarter of 2016, the largest quarterly increase since the fourth quarter of 2013. Business inventories gained 0.4 percent in December from November. And first-time jobless claims for the week ending Feb. 11 rose 5,000 to 239,000; the four-week moving average increased 500 to 245,250.

A look ahead

With the stock market closed today for Presidents Day, it will be a short week of releases, highlighted by updates from Markit on manufacturing as well as reports on existing and new home sales and consumer comfort. The Fed will also release the minutes of its January meeting.

This commentary was prepared specifically for your wealth management advisor by Northwestern Mutual Wealth Management Company.

The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.

All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.

The Dow Jones Industrial Average Index is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Standard and Poor's 500 Index (S&P 500) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Standard & Poor's offers sector indices on the S&P 500 based upon the Global Industry Classification Standard (GICS). This standard is jointly maintained by Standard & Poor's and MSCI. Each stock is classified into one of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of revenue. Standard & Poor's and MSCI jointly determine all classifications. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities.

The NASDAQ Composite Index® Stocks traded on the NASDAQ stock market are usually the smaller, more volatile corporations and include many start-up companies.

NASDAQ – National Association of Security Dealers Automated Quotations. The NASDAQ is a computer-operated system owned by the NASD that provides dealers with price quotations for over-the-counter stocks.

The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.